Rajan calls for greater global monetary policy coordination

SummaryReserve Bank of India (RBI) governor Raghuram Rajan on Wednesday made a case for more coordination in monetary policies by different central banks to deal with the spillover effect on emerging markets.

Reserve Bank of India (RBI) governor Raghuram Rajan on Wednesday made a case for more coordination in monetary policies by different central banks to deal with the spillover effect on emerging markets.

“...my call for more coordination in monetary policy... In its strong form, I propose that large country central banks, both in advanced countries and emerging markets, internalise more of the spillovers from their policies in their mandate...," Rajan said at a conference organised by Bank of Japan in Tokyo.

He further said that given the difficulties of operationalising the strong form, “I suggest that, at the very least, central banks reinterpret their domestic mandate to take into account other country reactions over time, and, thus, become more sensitive to spillovers".

Rajan said the current “non-system in international monetary policy is, in my view, a source of substantial risk”, both to sustainable growth as well as to the financial sector.

“It is not an industrial country problem, nor an emerging market problem, it is a problem of collective action. The sooner we recognise that, the more sustainable world growth we will have,” he said.

The governor also made a case for setting up of strong international safety nets to discourage countries from accumulating huge foreign exchange reserves. “...we should reduce the incentive for countries to engage in a repeat of substantial reserve accumulation by building stronger international safety nets,” he said.